There are so many different ways to invest your money, from stocks and bonds to crypto, NFTs, gold, and much more. Yet, investing in a rental property remains a very popular way to generate passive income, something you can benefit from for the rest of your life.
Passive income
Every month, you receive rent from the tenants in your property. This rental income can be seen as passive income, a fixed amount deposited into your account each month. Although there are risks like vacancy (a period without tenants) or tenants who don’t pay, rental income is generally quite stable and predictable.
Before purchasing a rental property, it’s advisable to calculate the expected direct return from your rental income. You do this by subtracting all estimated costs such as insurance, property taxes, mortgage payments, maintenance, ground lease, etc., from the annual rent. Divide this net annual rental income by the equity you’ve invested in the property to get the direct return. Ideally, you want this to be at least between 3-4%.
Appreciation
Besides the direct return, you also benefit from potential price increases in the real estate market over the long term. These are much harder to estimate because no one knows exactly what the future holds, so it’s better not to have overly high expectations. You can find more about the current housing market and historical house prices in our blog post here. By partially financing an investment property with a mortgage, you can increase the potential appreciation.
Mortgage Leverage
The mortgage on your investment property creates a leverage effect because it reduces the amount of equity you need to contribute. So, you make the same profits with less personal capital, resulting in a higher return.
Simple example:
Suppose you buy a property for €400K with €80K equity and a €320K mortgage. If the property value increases by 5% the following year, it’s worth €420K, and your equity is €100K (Property value minus the mortgage). You’ve made a €20K profit on your €80K investment, or a return of 25% (better than the 5% if you had bought the property entirely with your own money).
Less volatility
If you invest in the stock market, you probably know what volatility is: stock prices can vary greatly from day to day, with days of high gains (+5% and higher) but also days of sharp declines (-5% and lower). Over the long term, the stock market does go up, but this rollercoaster feeling can be quite emotionally exhausting if you regularly monitor your portfolio, and it generally means more risk.
Real estate has much lower volatility, consequently bringing more stability to your portfolio and perhaps reducing the number of sleepless nights worrying about declines in your portfolio.
Inflation protection
Of all investment types, real estate is the most correlated with inflation. So, when prices rise due to inflation, the value of a property often increases, as does the rent. Most rental contracts stipulate rent increases to follow inflation, causing your rental income to move upwards and providing protection against inflation.
Easily investing in a rental property
You can do it entirely yourself and purchase your first rental property. However, it’s not as simple and accessible as investing in the stock market. It can require quite a lot of time and hard work, and in many cases, you need a substantial amount of money.
That’s why we started BRXS: a platform where you can directly invest in investment properties of your choice starting from €100 and build your real estate portfolio. You earn rental income and also benefit from long-term appreciation. This way, you can learn by doing, gain experience, and perhaps apply it later if you want to go completely independent.